Futures Contract Valuation Question

Easy Forward Pricing And Valuation Futures Contracts

ABC Corporation is currently planning to hedge its exposure to an anticipated purchase of 1,000 barrels of crude oil, expected to occur in three months. The current spot price of crude oil is $70 per barrel, and the annual risk-free rate is 3%. The futures price for crude oil contracts with a delivery date in three months is quoted at $72 per barrel.

ABC Corporation is considering locking in the futures price to eliminate the risk of price fluctuations. Which of the following statements is most accurate regarding the futures contract that ABC Corporation intends to engage in?

The cost to ABC Corporation for future delivery will be $70, as that is the current spot price.

The futures price of $72 reflects the market's expectations of future price movements.

ABC Corporation will definitely incur a loss if the futures price increases above $72.

Hint

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